Table Of Contents
How Charter Schools Affect Local Governments
Most Municipalities Have Maintained Credit Quality Despite Reduced State
Aid
The Risks Of Charter School Expansion
Budget Pressures Have Been Managable … So Far

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DECEMBER 5, 2016 1
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Why Massachusetts Charter Schools Haven't
Damaged Municipalities' Credit Quality
On Nov. 8, 2016, Massachusetts voters defeated a referendum to increase the number of charter schools in the state,
thus maintaining the existing cap on charter school expansion. Had it passed, the referendum would have allowed as
many as 12 new charter schools to open each year regardless of the budgetary impact on cities and towns. The current
cap limits the number of charter schools to 120 and requires that charter school spending be less than 9% of the
respective city's or town's educational budget (and 18% where academic performance is low).
The state's 78 charter schools, located in 39 municipalities, have not had a measurable impact on the credit ratings of
local governments to date. Although S&P Global Ratings has seen reduced fund balances and pressured budgets in
cities and towns with a high number of charter school students, it has not seen financial stress significant enough to
lead to downgrades.
Even within the confines of the existing cap, if not managed effectively in the future, charter school expansion may
serve as a credit pressure. This is particularly true in municipalities that have a limited capacity to cut expenditures
and where demand for charter schools is high.
Overview
• Charter schools have not had a measurable impact on the credit ratings of Massachusetts local governments to
date.
• Several municipalities have had difficulty balancing their budgets because of reduced state aid associated with
charter school allocations.
• Even with the cap on charter school expansion, we could see credit pressures for communities that have high
demand for charter school expansion and where municipal leaders confront obstacles in consolidating
operations.

This report does not evaluate the social or educational benefits of charter schools--nor does it take a stance for or
against the ballot question--it merely considers charter schools from a credit standpoint.

How Charter Schools Affect Local Governments
Every child who leaves a public school to attend a charter school takes with him or her anywhere from $8,500 to
$20,000 of state aid for charter school tuition that would otherwise have gone to the school district. The total sum of
money per student is roughly equal to the average per-pupil spending in the sending district.
In 2017, the city of Boston will see $135.2 million in state aid reallocated to charter schools, equivalent to 15.3% of the
education budget and 4.7% of the city's total budget. The cities of Springfield and Worcester will see $35.5 million and
$22.4 million reallocated, respectively. Although these figures are high, the reductions have occurred incrementally
and over time, allowing municipalities some flexibility in modifying their budgets to make up for shortfalls.

Furthermore, in recognition that it takes time to adjust for lost revenue, Massachusetts reimburses school districts for
charter school tuition fully in the first year, and 25% in each subsequent year for a total of five years. As a result, for
every child that leaves for a charter school, the school district continues to receive state aid to educate that child,
amounting to a sum total of 225% of the annual cost of educating that child over that five-year period. In recent years,
however, Massachusetts--which faces budget pressures of its own--has not kept pace with state aid reimbursements.
According to the Massachusetts Budget and Policy Center, the state has provided only two-thirds of reimbursements
in the past two years.
While the reimbursement is intended to mitigate the impact of lost revenue, we recognize that without proper budget
planning and management, it might not go far enough in protecting school districts from operating shortfalls. School
districts take time to downsize, and communities may be reluctant to close schools or could have limitations in terms
of how quickly they can adjust their budgets for the lower student population.
For example, Boston has the highest number of students attending charter schools in Massachusetts: 18.8% of its
53,350 students are enrolled in charter schools. Because so many students have left the school system, a recent
McKinsey & Co. study suggests that Boston could safely close 30-50 schools (or consolidate 40% of operations)
without affecting services. Yet the city's administration faced considerable community resistance this past year when it
attempted to close schools and reduce funding for public education. In May 2016, the administration reversed its
position to reduce the school budget after hundreds of students walked out of class in protest. In their 2016 budget,
city finance officials called the decline in state aid relating to charter school tuition "one of the biggest budgetary
challenges facing Boston."

Most Municipalities Have Maintained Credit Quality Despite Reduced State Aid
On the whole, local governments' credit quality has been unaffected by charter school openings. We note that in many
communities, fund balances have remained stable or have increased because cities and towns have been able to
compensate for lost revenue through forward planning, new revenue streams, and cost consolidation. Strong economic
conditions have also helped mitigate lost state aid as cities and towns are reporting higher-than-anticipated revenue
from new growth, excise taxes, and meals taxes.
For example, Boston's reserves have risen by 32% since 2012 despite the city's high percentage of charter school
students. Likewise, the city of Malden's reserves grew by 43%, and the city of Chelsea's increased by 39%.
Some communities have experienced constraints on their operating performance and budgetary flexibility, which
could lead to rating pressure over time if municipalities don't take measures to manage lost revenue. The cities of Fall
River, Holyoke, and Springfield, each of which has a high percentage of charter school students, all saw reserves
decline in recent years, which--in our opinion--could signal financial distress. We recognize there are other factors at
play, however, and that there is not a direct correlation between fund balance decline and charter school enrollment.
In Fall River, 15% of the student population is enrolled in charter schools, and from 2014 to 2015, the city's reserves
fell to $3.1 million (or 1.3% of expenditures) from $11.5 million. Holyoke has 16.5% of its student population enrolled
in charter schools, and it saw a 16% decrease in fund balances to $20 million in 2015 from $24 million in 2012.

Springfield, which has the fourth-highest percentage of charter school students in Massachusetts, saw reserves decline
13.7% over the past three years.
Under the cap, the number of students who can leave a school district to attend a charter school is limited so as not to
have an outsized impact on the sending district's budget. As noted previously, most school districts cannot spend more
than 9% of their budget on charter school tuition, and for the lowest-performing schools, the cap is 18%. We note that
the municipalities of Edgartown, Everett, Fall River, Franklin, Lawrence, Lowell, and Malden, as well as Up-Island
Regional School District have all reached their cap.

The Risks Of Charter School Expansion
Under current statutes, an additional 42 charter schools may open in the state before reaching the cap of 120. The
Massachusetts Department of Elementary and Secondary Education reports that charter schools are currently
proposed in or near the cities of Springfield, Lynn, and Brockton, and the towns of Plymouth, and Southbridge.
In every area a charter school opens, nearby cities and towns eventually face a reduction in state aid. And while some
municipal budgets can absorb the revenue loss through simultaneous cuts or new revenue sources, not every
municipality has adequate flexibility to adapt.
We believe the greatest credit risk is among the lowest-performing school districts (which can spend 18% of their
budget on charter school tuition) and those that have capacity or demand to open additional seats. Where we've seen
the greatest budgetary pressure to date has been in communities subject to the higher cap. We also believe
communities with higher fixed costs, greater dependence on state aid, and limited flexibility to cut expenditures are
likely to be at greater credit risk.
However, we note that the approval process for new charter schools through the Massachusetts Department of
Elementary and Secondary Education provides a level of protection for municipal finances. Because newly proposed
charter schools must go through an extensive application process, state officials can ultimately reject applications if the
location of the charter school would have a detrimental effect on neighboring public schools. In our view, this approval
process somewhat mitigates the risk of sharp state aid reductions for local governments.

Budget Pressures Have Been Managable … So Far
The current funding structure for commonwealth charter schools has led to budget pressures for several municipalities
as they adjust to reduced state aid. In general, however, local governments have been able to manage with less state
aid through forward planning, consolidation efforts, and positive economic growth. Therefore, we have not seen a
measurable impact to date on local governments' credit conditions. We see the current cap on charter schools as a
safeguard for municipal budgets. However, we also recognize there is sufficient room under the cap that could
eventually lead to credit deterioration. We are closely monitoring cities and towns that we believe are at greatest credit
risk, including those subject to higher charter school spending thresholds (18%) and those with limited flexibility to
consolidate operations.